Question

17) Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and nine million dollars in excess reserves. Given this information, we can say First National Bank has ________ million dollars in required reserves.

18)Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and nine million dollars in excess reserves. Given this information, we can say First National Bank faces a required reserve ratio of ________ percent.

19)Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, one million dollars in required reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars in excess reserves.

Answer 1

17) 1 million dollars
(Required reserves = Total reserves - excess reserves = vault cash + deposits with Federal Reserve - excess reserves = 2 + 8 - 9 = 1)

18) 10 percent
(Reserve ratio*total deposits = required reserves (= 1 found above)
So, Reserve ratio = required reserves/total deposits = 1/(2+8) = 1/10 = 0.1 = 10 percent)

19) 9 million dollars
(Excess reserves = total reserves - required reserves
Required reserve ratio = 10% = 0.1
And required reserves = 1 million
So, total reserves = required reserves/reserve ratio = 1/0.1 = 10
Thus, excess reserves = 10 - 1 = 9)